SHANGHAI, Jan 4 (Reuters) - China stocks started 2016 on a rough note on Monday, slumping 4 percent after weak factory activity surveys soured hopes that the world’s second-largest economy will enter the new year on better footing.

Investors also dumped stocks ahead of the imminent expiration of a share sales ban on listed companies’ major shareholders, which had been imposed during the market crash last summer.

The blue-chip CSI300 index fell 4.0 percent to 3,581.41 points by the lunch break, while the Shanghai Composite Index lost 3.9 percent to 3,399.91 points.

A 5 percent rise or fall in the CSI300 would trigger China’s circuit breaker mechanism, which took effect on Monday.

The heavy selling also spread to Hong Kong. The Hang Seng index dropped 2.3 percent to 21,409.39 points, while the Hong Kong China Enterprises Index lost 2.8 percent to 9,393.07.

A private survey showed China’s factory activity contracted for the 10th straight month in December, and at a sharper pace than in November. An official survey on Friday, which focuses on larger, state-owned firms, showed a fifth month of contraction, though a pick-up in the services sector could cushion the impact on the broader economy.

“While some softness in the manufacturing sector was to be expected, having two major indicators pointing towards the same bearish direction is clearly impacting the market,” wrote Gerry Alfonso, director at Shenwen Hongyuan Securities Co.

Investors fear a glut of equity supply could swamp Chinese markets this year, with a six-month share sales ban imposed on listed companies’ major shareholders due to expire on Jan 8.

A new set of rules for initial public offerings took effect on Jan. 1, while the government may launch a U.S.-style registration system for IPOs as early as in March, potentially making it easier for companies to list.

“Investors are worried about a flood of share supplies coming to the market,” said Shen Zhengyang, analyst at Northeast Securities.

Analysts also attributed Monday’s sell-off to weakness in the yuan, which the central bank allowed to slip to fresh 4-1/2-year lows, adding to worries about increased capital flight as economic growth grinds lower.

Shanghai stocks ended 2015 up nearly 10 percent, beating Wall Street and most other major markets, and shaking off a savage summer rout that wiped out a third of the market’s value at one point.